To date, according to the report, only a third of GPs have come up against competition of this kind from LPs, but almost half expect to do so in the future and only a quarter think that the trend is a fleeting one.
Of particular interest to mid-market firms is that the survey’s GP respondents expect heightened demand from LPs for mid-market direct investment opportunities in the $150m-$500m (€135m-€450m) range.
The driving forces behind this trend are fund terms and specifically fee levels, with over half of respondents saying that they think LP concern over fees is driving them to invest directly.
“Looking to the future, GPs will need to examine the way that their fees are communicated and justified to investors, and work harder to demonstrate the value that their expertise brings and the returns they can achieve,” recommends the report.
The report also highlights the removal of hurdle rates by some private equity firms as a potential factor driving direct investment. A recent report from Preqin, meanwhile, noted that some firms are introducing higher hurdle rates in an attempt to appeal to investors.
Implications for GPs of increased direct investment are likely to include increased competition for targets; price inflation; and a negative impact on fundraising as money that once would have been allocated to GPs is diverted into direct investment instead, the report adds.